Neil O'Brien is Director of Policy Exchange, an independent think tank working for better public services, a stronger society and a more dynamic economy. He writes in a personal capacity.

Welfare reform: what exactly has been agreed?

The government has already started reform of housing benefit (Photo: Getty)

So IDS has apparently won his battle to reform the cash benefits system. But the reports this morning tell us frustratingly little about the detail of what’s been agreed. Here are some of the issues to watch:

Where are the savings coming from?

The Times report this morning talked about £9 billion of gross savings, some of which IDS will then spend on his new scheme. So the first question is where these savings are going to come from. The Times mentioned an ongoing discussion on Child Benefit (which we spend £12 bn a year on) and indeed it is difficult to see how they can get to 9 billion savings without something big there. The government seem more inclined to cut the age at which child benefit ceases than to means test it. Let’s say that saves 4 billion or so. Where are the other savings coming from? The government has done quite a bit on housing benefit reform already, so the other big benefits they should look at again are disability living allowance and tax credits. They don’t seem every inclined to go after things like free bus passes (£1 billion) or the winter fuel payment (£2.5 billion). Although they are very poorly targeted (less than a fifth of people who get winter fuel payment are in fuel poverty) they are thought to be too hot to handle politically.

What proportion of the savings does IDS plan to spend, and what’s the taper rate going to be?

If you don’t want to take away so many of people’s benefits as they start doing more work, then you have to have a slower withdrawal rate – in other words, you let them keep more of each pound they earn. The Times this morning talked about a withdrawal rate of 60-65%. In other words, allowing people leaving benefits to keep 35-40p in every extra pound they earn. The exact number will make a huge difference to the cost. It will presumably take four or five years to phase in IDS’ new “universal credit”, so the costs will not all apply immediately. IDS hopes that increasing the financial incentives to work will partly pay for itself, by encouraging more people to leave benefits. Will the Treasury allow IDS to factor in such hoped-for savings? The traditional Treasury answer to this is “not on your life”, because ministers are forever presenting them with spend-now-save-later type schemes.

Are the hours rules dead?

There was no mention in the Times piece of one of the main issues that has framed the discussion: whether or not to keep some kind of hours rules. At the moment you get a big wodge of cash if you work over 16 or 30 hours. The upside of this is that people can’t just do a couple of hours work while remaining on benefits. If you get rid of the hours rules people might work less, and you would have to rely on interviews or some kind of other conditions to get them to work more over time, which could be really difficult. On the other hand, the hours rules do make the system more complicated. There is little financial incentive to do a job with fewer than 16 hours. Such mini-jobs might help people get used to working again – particularly if they have been on Incapacity Benefit for years. The fact that there is no mention of this issue could imply that IDS has got his way.

What about the take up rate, and savings on administration costs?

One concern that some welfare experts have about the scheme is that it might lead to higher take up rates for benefits, and therefore cost lots of money. Ian Mulheirn at the Social Market Foundation thinks this could wipe out a large chunk of the proposed savings. On the other hand Mike Brewer at the Institute for Fiscal Studies argues that hoping people will be deterred from claiming benefits by bureaucratic obstacles isn’t a good way to run our system. Either way, no one really knows how big or small this effect might be. On the other hand, fans of the IDS scheme say that simplifying the system should save admin costs. But again, the numbers are unclear.

What about the other aspects of welfare reform?

I wrote recently about what I see as the missing debates on social housing and “conditionality” (i.e. pressure to work). If IDS has managed to get to put a wrapper round all the different benefits, then that will have big implications for these other welfare reform discussions. Firstly, more generous incentives to work might create political “space” for stronger pressure to take jobs (bigger carrot, bigger stick). Secondly, it could mean that people who are on benefits because they are lone parents or incapacitated could face requests to work more like those faced by other unemployed people. IDS’s scheme would break the link between the type of benefit you are on, and what we expect of claimants in return.

Overall it seems to me there are quite a lot of unanswered questions. That may be because the Times has stumbled on something that was going to be announced later. It will be fascinating to see what exactly has been agreed.